Why is finance so dumb? Photo: Helloquence. Source: Unsplash In an era of mobile computing and 3-D printing, financial analysis is stuck in the ‘80s. The principal tool of the analyst is the spreadsheet -- something that Lotus 1-2-3 popularized in 1983. While our PCs can access big data and execute cloud-based massively parallel computing, spreadsheets still have the same machine-code A1 cell-structure. The most advanced Excel function is a macro. Consequently, finance hasn’t moved past summing up columns and rows. Predictive algorithms and [...]

Is this glass half full? Or half empty? Photo: Viktor Hanacek. Source: Picjumbo Sales types look out and see infinite possibilities. Accountants see the world as debits and credits, as a process to be managed. Sales-dominated organizations emphasize growth; accounting-centric firms focus on profitability. Put simply, sales brings in the dough, while accounting gets to the bottom line. Both are necessary to any successful enterprise. But there’s often a lot of conflict between the two. Sales people can feel like they own the business. [...]

How do we know what a company is worth? Photo: X. Source: Pixabay We want to base our investments on facts, not feelings. One reason Apple is worth more than GM, even though GM has twice as many employees, is that Apple earns more – five times more – than the car giant. Both companies have iconic brands with global scale. But Apple is far more profitable . But how do we know this? We know it because of double-entry accounting: debits, credits, income, [...]

Can we find financial fraud in advance? Enron Logo. Source: Wikipedia Not always. But published financials can give us clues when managers might be cooking their books. Published financial statements are supposed to reflect reality: they’re supposed to give let us know how the business is doing in its day-to-day operations. But we live in a world where investors – and computer trading systems – often fixate on just one number: earnings per share (EPS). That number is supposed to the single best indicator [...]

Do imports reduce the size of our economy? Source: Econstories It’s not as simple as you think. Yes, C+I+G+X-M = Y. Consumer spending plus business Investment plus Government spending plus eXports minus iMports equals the total economy. On its face, if you reduce what you’re subtracting, the sum total should be bigger, right? It’s a little more subtle than that, though. It’s unclear which comes first, the size of the inputs or the size of the economy. Just because an equation describes something doesn’t [...]

Do currency exchange rates matter? Brazilian Real priced in Dollars. Source: Bloomberg More and more companies do business around the world. Toothpaste-maker Colgate-Palmolive has 30% of its sales in Latin America, but only 20% of its assets there. About half of their long-term assets are in Europe and the US. Clearly, they’re a global company with a global brand focused on basic needs. Their worldwide revenue growth has fluctuated, but their value has definitely grown over time. The shares have returned about 13% per [...]

What good are financial statements? Photo: James DeMers. Source: Pixabay That may seem like a funny question from a financial analyst. But financial statements can distort, rather than reveal, the nature of a company. Beyond outright fraud, where managers just make things up, there are counterintuitive accounting practices that are misleading, like marking liabilities to market. For example, during the financial crisis, when companies got into trouble their debt was downgraded. This created an earnings boost, as their liabilities got cheaper when they were [...]

There’s a mystery lurking in Silicon Valley. Source: Open Clipart Over the past decade and a half the tech industry has quietly added over $60 billion onto its collective balance sheet. Where did that money come from? And where did it all go? The money is hiding in plain sight, on a balance sheet line called “goodwill.” Goodwill is created when a company pays a premium for another company. It’s a way to lump all the “good” items together that make an acquisition worth [...]

How much is a stock worth? Deutsche Bourse. Source: Wikipedia The short answer is, whatever someone is willing to pay. But what should they pay—what’s fair? There’s lots of ways to answer that question. The most fundamental approach is to calculate all the cash flows that an investor expects to receive in the future, discount these to their present value, and add them up. The total is the “fair” value: the discounted sum of all the future cash flows. But there are two problems: [...]

Are corporations becoming too transparent? Photo: Chance Agrella. Source: Free Range Stock Photos Goldman Sachs’s annual report was over 400 pages. GE’s 10-k contained over 100,000 words. Annual reports today are dense, filled with jargon, and longer than a Russian novel. Are these corporate leviathans trying to obscure what they’re doing—trying to hide the truth in plain sight? Part of the reason annual reports have gotten so big has to do with the complexity of the businesses themselves. Goldman Sachs and GE are much [...]